The Evolution of the Vehicle Rental & Carsharing Ecosystem:

Future Impacts on Mobility

Over the past few years, new carsharing and vehicle rental business models, cloaked in technology and smartphone apps, have progressed and infiltrated the mobility landscape and impacted not just the traditional rental market, but the for-hire vehicle industry, too. The rising costs of vehicle insurance and ownership have helped fuel the growth of rental options nationally. Not only have passengers opted to rent instead of own or lease vehicles as a national trend, but also many for-hire drivers have opted to rent on a daily or long-term basis when working for mobility companies.

Traditional car rental companies have entered the space as well, and now, after obtaining a Transportation Network Company (TNC) or for-hire commercial operator’s license, a driver can simply rent a car for the day and drive part-time for-hire, and return whenever desired. This flexibility for drivers to rent instead of own or lease for-hire vehicles allows them to reduce costs, for example, by going on vacation without needing to pay leasing expenses while the vehicle sits idle. The gig economy has affected not only passenger choices, but the choice of the workforce in how they operate their businesses. Sharing vehicles has become an increasing trend among both passengers and professional drivers, and it affects many more aspects of the mobility landscape.

This article will define and explain the various business models, investment trends and multi-modal strategies and ventures involving vehicle rental and carsharing, as well as the evolving legal and regulatory landscape of insurance, tax, duty of care and liability issues. The difference between peer-to-peer and business-to-consumer carsharing, the differing legal paradigms and the rise of car rental in the for-hire segment will be explained, and thoughts or prognostications will be offered as to where these business models may collide, merge and compete as we approach an autonomous and connected future.

What is Carsharing?

In a nutshell, carsharing is a short-term car rental, usually offered through membership in a carsharing service. Members of carsharing services like Avis Budget Group’s Zipcar, Daimler’s Car2Go, and B­­­­­­MW’s DriveNow have access to insured vehicles for their personal use in exchange for a fee each time they use a vehicle. Unlike a traditional rental company, the vehicles are available for rent by the hour. Moreover, the carsharing vehicles are located where the renters are: local streets in neighborhoods, in parking garages and at public transit hubs, airports, university campuses, apartment and office buildings, and other locations.

There are different types of carsharing service models, but common features are that they provide renters with an insured vehicle, maintenance and parking between rental periods. Carsharing can be round-trip or one way. In a “station-based” model, the vehicles must be returned to a dedicated location at the end of the trip. But, in a “free floating” model, when a renter is done with the vehicle, the renter may leave the vehicle parked anywhere within a certain zone. The vehicles are either part of a fleet or owned by individuals who are renting out their private vehicles.

In the beginning, there was Zipcar and other companies that owned and maintained fleets of vehicles for carsharing rentals. Not unlike the for-hire vehicle industry, the carsharing industry has been disrupted by – and evolved with – technology, incorporating new functionality, technology and business models. One of the most dramatic changes shaking-up the carsharing industry is Peer-to-Peer (P2P) carsharing. At its core, peer-to-peer carsharing is a model where individual vehicle owners loan their cars to others to use, possibly for a fee.

In the peer-to-peer carsharing service model, individual vehicle owners are able to rent their vehicles to others through a third-party carsharing service that manages the rental transaction. Companies like Turo and Getaround provide the marketplace – usually an app or online platform – and organizational resources to facilitate these personal rentals, such as customer support, insurance and technology.

Vehicle Trends: How has the rental industry changed?

Carsharing offers a type of transportation that is usually possible only through owning a car. Popular in urban areas where parking is scarce and public transportation options are high, carsharing services are changing the transportation landscape and may be moving people away from the costs associated with personal vehicle ownership. According to the American Automobile Association (AAA), the average annual cost to own and operate a new vehicle is $7,321 – and that does not include parking, which costs, on average, $2,728 per year. In New York, the AAA found that the annual cost of flat-rate parking is $8,088.

For over a century, cars have been at the center of American culture. Getting a driver’s license and buying a car were considered rites of passage. With the advent of carsharing and ride-hailing (and the not far-off proliferation of autonomous vehicles), this is changing. In the coming decades, transportation will more likely be determined by advances in technology, influenced and informed by the needs of the consumers who use them. It is well-documented that millennials, who have enjoyed a more flexible lifestyle because of technology, are more likely to live in cities when compared to their parents and other generations before them. These groups – who may have the financial ability to own a car – no longer have the desire or need to own one.

When it comes to the overall future of vehicle ownership, the reality may be more complicated than we think. According to a report from AutoTrader.com, 84% of older millennials (ages 25-32) already own personal vehicles, while fewer than half of younger millennials (ages 16-24) have bought a car. Although young people in cities are willing to treat transportation as an on-demand service, it is unclear how mobility will change in the surrounding suburbs. It is also likely that personal-vehicle usage will remain the preferred method of transport in rural areas. As such, millennials have yet to solidify themselves as true personal vehicle consumers.

What is clear is that carsharing is booming around the world. According to Professor Susan Shaheen’s team at the Transportation Sustainability Research Center (TSRC), U.C. Berkeley, as of October 2016, business-to-consumer carsharing was operating in 46 countries and on every continent (except Antarctica). TSRC estimates that there are approximately 15 million total members sharing more than 157,000 vehicles. In North America there are an estimated 37,854 members and 26,691 vehicles, making it a relatively small market for carsharing. Asia is the largest carsharing market, comprising 58% of worldwide membership, and 43% of all vehicles. Europe is in second place, with 37% of the global vehicle fleet. In 2018, short-term rentals in Moscow tripled to 16,500 vehicles and rides more than quadrupled to 23 million, and the city has the largest shared fleet in Europe and the second-largest in the world, after Tokyo.

Station-based and round-trip carsharing, like Zipcar and Maven, account for the majority of all fleets, while free-floating models, such as car2go and DriveNow, are a growing segment. In terms of both fleet size and membership, the peer-to-peer service model is growing rapidly. Between January 2016 and January 2017, the peer-to-peer service fleet has increased by 80% and membership has more than doubled.

The desire to rent or share vehicles has even infiltrated the supply-side of mobility services, with new apps that allow professional drivers to rent licensed taxicabs and other for-hire vehicles for part-time shifts while the company manages all aspects of vehicle maintenance, insurance and other functions. Launched in September 2017, the NYC Taxi Group released the Lacus Driver as part of the TLC’s Flexible Lease pilot to offer an alternative to the inflexible “5-to-5” 12-hour leases that had been the standard. Today, the Lacus platform has over 5,000 drivers and offers carsharing for professional taxi and black car drivers in addition to commercial vans and trucks and vehicles for regular transportation needs. Similar to Zipcar, Lacus drivers use the app to locate and unlock vehicles parked in designated curb-side spots and then return the vehicle to a designated spot when they’ve finished their shift.

Financial Trends: What are investors, start-ups and companies doing?

In January 2019, rival German automakers BMW Group and Daimler AG announced that they had been given the green light to combine their mobility service investments into a joint company. Under the deal, Daimler’s Car2Go and BMW’s DriveNow will be jointly-held by one company – called “Jurbey” – and each automaker will have a 50% stake in the venture. Daimler’s Car2Go is the largest carsharing service in the world in terms of fleet size and members. BMW was the second car manufacturer after Daimler to invest in carsharing with its business-to-consumer free-floating program, DriveNow/ReachNow. Other automakers getting into the field include General Motors, which backs Maven. In addition to offering GM fleet vehicles for short-term rentals, the Maven platform can also be used for peer-to-peer booking and can be used to rent cars to TNC drivers.

In August 2018, peer-to-peer rental start-up Getaround raised $300 million in a Series D round led by SoftBank, with the plan of expanding product offerings and partnerships and enter additional markets in the U.S. and internationally. In September 2017, peer-to-peer carsharing marketplace leader Turo closed a $104 million Series D round led by SK Holdings with an investment from Daimler. This followed a $12 million investment from Sumitomo Corporation and American Express Ventures, on top of a $92 million raise earlier in the year.

Regulatory Trends

Peer-to-peer carsharing services like Turo and Getaround are allowed to operate in every state except New York, which has explicitly banned Turo from operating in the state (more on that below). State and local governments treat traditional carsharing services the same as rental companies. In other words, they have the same taxes, fees and surcharges imposed on rental car transactions. P2P carsharing services are not. This has resulted in pushback from commercial fleet owners who are facing increasing competition from peer-to-peer services.

Maryland passed the first comprehensive state law to require peer-to-peer car rental companies to comply with state tax, insurance, and safety laws and regulations, including conducting safety inspections. Enacted in May 2018, the Peer-to-Peer Car Sharing Programs Act applies almost all of the same regulatory and taxation requirements that apply to traditional car rental companies and requires peer-to-peer car rental companies hold a limited lines license under Maryland’s laws to sell insurance regulated products. In addition, companies must comply with the national safety recall law that grounds vehicles under open recalls. Moreover, peer-to-peer companies operating at airports are subjected to airport contracts and airport fees for rental companies.

In Arizona, lawmakers have introduced competing legislation to redefine car rentals and carsharing. One bill (SB 1305) would ensure that peer-to-peer car rental services are treated – and taxed – the same as rental car transactions, while a competing bill (HB 2559) would create an entirely new regulatory framework for peer-to-peer companies and treat them differently than rental companies.

In August 2018, then Illinois Governor Bruce Rauner vetoed legislation (SB 2641) that would have regulated and taxed peer-to-peer car rental services like traditional car rental companies. An announcement from the governor’s office said that the governor “rejected the idea of regulating and taxing car sharing out of business,” citing the economic potential that the service has for the state, as well as easing pressure on public transit and parking inventory, and helping consumers afford vehicle ownership.

In the words of Yogi Berra, “it’s like déjà vu all over again.” If you’re feeling like we’ve already lived through this, it’s because we have. This is nearly the same debate that legislators had when Uber burst onto the scene and wanted to be treated differently than taxis.

Tax Issues

There are disparities and a lack of uniformity on tax related issues which may impact the business models and costs involved in carsharing versus TNC or mobility services – especially in the area of sales tax. According to research by DePaul University, 25% of the largest U.S. cities imposes retail taxes on that increase the cost of a one-hour carsharing rental by more than 30%, 29 of these cities increase the cost by 10%, and several cities impose transaction taxes of $2-$4 per rental. These taxes and fees – which are higher than sales taxes on other sectors – were originally created to generate revenue from conventional car rentals and put carsharing services at a disadvantage to ridesourcing services that are generally exempt from sales taxes.

According to the Institute on Taxation and Economic Policy (ITEP), most states do not impose a sales or use tax on trips in taxis or other for-hire vehicles, including TNCs. ITEP analysis found that only eight states have avoided this “historical accident” and currently apply sales or gross receipts taxes to taxi fares (Georgia, Hawaii, New Mexico, Ohio, Rhode Island, South Dakota, Washington, and Wyoming). Rhode Island disillusioned TNCs of any belief that they were somehow exempt from the tax that applied to taxis and limos by amending the tax law to make clear that “an entity… that uses a digital network to connect transportation network company riders to transportation network operators who provide prearranged rides” must collect sales tax. Uber ended up paying 18 months of back taxes that it had been holding on the basis ambiguities in the law. In September 2018, California Gov. Jerry Brown signed a bill (A.B. 1184) that will put an initiative before voters this year on whether to impose a 3.25% tax on TNC rides, with a discounted 1.5% tax if the trip is pooled. Both Uber and Lyft supported the bill.

Insurance Issues

Standard liability policies do not permit the use of vehicles in commercial enterprises. Livery exclusions were written because transporting passengers for a fee adds exposure and creates more risk than the insurance company contemplated for things such as additional miles driven, unfamiliar roads and increasing the number of people in the car who could be injured. In addition, renting out a personal auto through a peer-to-peer program may violate the owner’s personal auto policy and could result in the cancellation or nonrenewal of the policy.

At least three states – California, Oregon, and Washington – have passed laws that generally prohibit insurance companies from dropping coverage simply because the owner is renting the vehicle via a car-sharing service. Vehicle owners who rent out their vehicles in states lacking personal vehicle sharing legislation risk non-renewal of primary insurance policies, as well as premium spikes resulting from increased use.

The Insurance Services Office, Inc. (ISO) developed a Personal Vehicle Sharing Program Exclusion endorsement to limit coverage when a covered auto is enrolled in a peer-to-peer car rental service, possibly because of concern that the livery exclusion and the business exclusion would be inapplicable. The endorsement specifically excludes coverage for liability, bodily injury, physical damage or property damage when a “covered auto” or a “non-owned auto” is being operated within the context of a peer-to-peer car rental program. The scope of the exclusion is limited and applies to the renter and the renter’s passengers. The endorsement has been approved by the Maryland Insurance Commissioner and is in use in Maryland.

In New York, the current insurance framework does not ensure that private passenger motor vehicle owners and renters participating in personal vehicle rental programs are fully insured. While peer-to-peer car rentals are not explicitly illegal in New York, renting out a personal vehicle could constitute a commercial use of that vehicle. In March 2014, New York State Department of Financial Services and Turo (then known as RelayRides, Inc.) entered into a consent agreement to resolve an enforcement action brought against the company for repeated false advertising and violations of New York insurance law. As part of the agreement, Turo paid a $200,000 penalty and voluntarily agreed to cease operating in New York until it can demonstrate that its business plan and advertising is consistent with New York Insurance law.

New York introduced, but has not enacted, legislation (S3506) to create a regulatory framework for peer-to-peer carsharing. In January 2017, State Senator James Seward first proposed the “Personal Motor Vehicle Sharing Act personal motor vehicle sharing act” to establish insurance requirements for and limitations on personal vehicle rental programs. The bill would amend the New York insurance law and the vehicle and traffic law to provide the necessary insurance coverage for private passenger motor vehicle owners and renters participating in personal vehicle rental programs so that peer-to-peer car sharing companies may operate in New York. This bill would provide the necessary authority for peer-to-peer car sharing companies to purchase group insurance for the rental program, thereby providing coverage for the vehicles enrolled in the program during the periods in which those vehicles are being rented and in the control of the peer-to-peer car sharing program. The legislation has been introduced in the current legislative session by Senator Neil D. Breslin, the new chair of the State Senate Committee on Insurance, as its sponsor, with Senator Seward, the former Insurance Committee chair, co-sponsoring the legislation.

Car Sharing & Rental Vehicle Mobility Prognostications

In terms of the future, it is likely that we will see more cross-pollination between car rentals on the back-end of mobility services. A for-hire or TNC driver who owns their own vehicle may wish to drive for-hire one day, rent the vehicle to another TNC driver who does not own a car the next day, and the next week rent the car to a passenger to use for a vacation or business trip. The sharing of vehicles on a platform serves as a potential method to reduce the costs of ownership, allow for flexible working environments, and to hopefully, over time, reduce the costs of transportation to passengers. Ultimately, these platforms in the short term will involve more merging of services between car rental companies and individuals on the back-end for supply purposes; on the demand side, passengers or renters will be able to open either a car sharing, TNC or other platform app to choose between a quick ride with an assigned driver, or where a the app user can rent a car for an extended period of time without an assigned driver. These on-demand options and business models are rapidly evolving and already happening at some levels.

It is inevitable that public transit agencies may even get in on the action for first and last mile and other Mobility-As-A-Service options. For example, a commuter who takes the train can rent a car located in a parking lot at the train station when coming home from week on a Friday night and then return it Monday morning while on the way to work. The provision of on-demand booking, numerous mobility options and convenience are inevitable. The implementation of a public and private platform where passengers or renters can load credit card information to pay for public transit and private rentals interchangeably presents liability or duty of care, data management, and other complications or sticky legal issues when involving governmental services and operations. A more likely way these services can be implemented in tandem with public transit would be franchises or concessions at or around municipal parking and transit curb space locations, with the outsourcing of app functionality and services to one or more private companies that can interface directly with the public.

It is refreshing to see that the carsharing industry is not engaging in illegal disruption as the TNCs did in their nascent rise by issuing ultimatums to regulators and simply ignoring laws and rules to commence operations, and then changing the laws after the fact. The TNC laws that were passed over the years came after – not before – the introduction of TNC services. Here, with the exception of NY State as an early warning to the industry, it appears that laws are being crafted, like in Maryland, to accommodate and encourage carsharing while addressing the liability, insurance, and other safety/regulatory/consumer issues – before the fact, not after. This will allow investors and consumers to feel more confident, and will allow the industry to scale better and faster if the example of Maryland is followed elsewhere.

The insurance industry and insurance regulators must keep-up with these new sharing models and find a way to make them work while protecting the public interest. Success or failure of the carsharing industry – across all of the business models – rests with regulators and private insurance companies embracing the changes that are happening and figuring out ways to reduce risk and costs to consumers and insureds. Some of the new laws are encouraging, but more needs to be done, including flexible ratemaking and filings for flexible car sharing models. Any inertia or resistance will stifle innovation in this sector. Likewise, tax laws should be conformed to create an even playing field and uniformity, possibly eliminating such taxes for everyone to encourage the use of shared mobility services.

It is all so very important that the cross-pollination of carsharing and vehicle rental with for-hire and other mobility services happens now, with as much experimentation as possible with public and private mobility platforms on both the front-end (demand/consumer facing) and on the back-end (supply/driver and car rental company inventory sharing). The results of these experiments are likely to guide both public and private decision-making on autonomous and connected vehicle implementation. The sharing of vehicles is an important part of our mobility future, especially as consumers expect the price or costs of transportation to stay low or reasonable. The partnerships between automakers and carsharing, rental and mobility companies could be motivated by any number of reasons, such as innocent experimentation, joint ventures and brand merger. There could also be more nefarious motives – such as spying on the competition or possibly even buying companies to put them out of business so that automakers can continue to sell cars to the masses without sharing. All possibilities are on the table right now, but the partnerships and experiments of today will be the future of autonomous mobility, where automakers or technology or mobility companies could turn technology platforms and apps into the deployment and sharing of automated vehicles owned by the government, private individuals, or companies, with any combination of ownership and sharing options.

It is truly mind boggling to think of where this could go. For now, everyone in neighboring spaces should be aware of these issues and trends because if overlapping companies in the ecosystem are not aware of where they are or should be in the ever-evolving food chain, certain transportation species or companies could find themselves facing extinction